The Greek government decided to open the debate on the
issue of home foreclosures for mortgages but due to the current economic
situation, banks do not want to hear about it. The government is trying to lift
the ban on home foreclosures but exclude those home owners who have only one
home, and are up to date on their installment payments.
Under current legislation home foreclosures are banned
until the end of 2013. The government though encountered huge opposition from
all parties, and was forced to set limits and conditions. For example, social
conditions, prompt installment payments, cuts in wages, and punish those that
are delaying their payments, and have a second home or deposits in other banks.
What prompted the government to open the debate was a pressure from Troika, and
the fact that after the completion of the recapitalization of the banks (due to
the haircut in debt), the balance sheets will be affected again by the bad
loans outstanding.
During the past years, the banks were well aware of
the problem they were facing with loans in red. Those loans have been financed
from their deposits, and in order to maintain a healthy ratio of deposits – to –
loans, it was essential to lift the ban and begin the process of home auctions.
Banks began a campaign of loan arrangements and they
communicated this to their customers. by a haircut in installment payments, and
balance outstanding. There was actually three ways which they could arrange
their loans: by debt installments without collateral, installment arrangement
with collateral, and haircut of the debt outstanding, with new settlement.
Of course this would meant to increase the time period
payback, grace period and payment of interest only, and suspend repayments.
Despite all the announcements by the banks, the problem with loans in red for
the Greek banking system is serious. Under current estimates, 163 billion euros
in deposits support 220 billion in loans outstanding. If under this equation one includes the
mortgages as collateral, with current market value way below cost (due to the
collapse of the real estate market in Greece), then the ratio of deposits /
loans covers the total loans outstanding. But since bankers are aware of the
real estate collapse, they are hesitant in home auctions for those who, while
financially able, are deliberately back in their loan payments.
The year 2012 was one of which red loans were on the
rise and this also raises the question how secured are the deposits in the
Greek banking system, despite the recent recapitalization. Banks are waiting for the audit of BlackRock,
to evaluate the percentage of loans not serviced. From this the banks will make
the necessary projections on their balance sheets, and find the equivalents
assets to cover for the bad loans. It is estimated that these red loans could
reach 70 billion euros.
No wonder why banks want to find a way out of the Balkans
and sell of assets, like their subsidiaries that show a low return to capital
employed. This is actually referring to the investment required for a business
to function. During the past years (before the crisis) most of the Greek major
banks invested in the Balkans by merging or acquiring other banks. The strategy
was to redeploy assets from a less profitable to a more profitable use. By
taking this capital and employing it this way, they were aiming at increasing
return on investment, and thus profitability.
Now that they are looking to sell these assets there
are no foreseeable investors due to the international financial crisis because
no one is investing. This will not help their balance sheets and so during the
second quarter of 2013, increased projections from red loans will cast a shadow
on operating earnings for the Greek banks. Operating earnings is profit earned
after we subtract expenses that are associated with the operating of the
business.
How do the Greek banks plan to encounter this problem?
Besides the above mentioned, the cost of money for banks is 4% in interest and
0.5% from borrowing from the ECB. They plan to gradually reduce the interest
rates on deposits (the 4% as mentioned above), and by the economies of scale
produced during the mergers and acquisitions in the mainland during 2012 and
2013. Economies of scale reduced variable costs due to operating efficiencies and
synergies.
Some interesting figures are worth mentioning. It is
estimated that business loans with no collateral make up 50% of total deposits,
and are at 106 billion euros. Consumer loans are estimated at 104 billion
euros, and 73 billion are mortgage loans. Credit cards, another headache for
the Greek banks, stand at 6 billion and 23 billion are consumer loans.
